In this thesis, the response of a provincial government's budgetary decisions with respect to changes in Federal conditional and unconditional grants was investigated with special reference to whether or not the responses of a high income province (Ontario) differed from those of a low income province (New Brunswick).
In order to facilitate the analysis, a theoretical framework (called Model I) was set forth in which a province's expenditure and tax responses to changes in net provincial product and Federal grants could be derived. Using this framework, separate equations were estimated for Ontario and for New Brunswick for those expenditures aided by the National Health Grant Program, the Trans-Canada Highway Program, the Hospital Insurance and Diagnostic Services Program, and the categorical welfare programs and the Canada Assistance Plan; and for other aided expenditures, unaided expenditures, and revenue.
Since expenditure data were not available according to the definitions required for Model I, separate expenditure equations could not be estimated, within the context of Model I, for education, fish and game, forest~ and lands (settlement and agriculture). Thus, an alternative framework (called Model II) was developed. In Model II, these data difficulties were taken into account through a reformulation of the province's quadratic utility function; this allowed the magnitude of the conditional and unconditional grant coefficients to be derived and interpreted prior to estimation. Nine expenditure equations and one revenue equation were estimated for Ontario and for New Brunswick within the framework of Model II.
The major difference between the dependent variables used in Model I and Medel II is that in the latter the dependent expenditure variable for each program area considered separately allows the inclusion of expenditures which may be both aided and unaided whereas in Model I the dependent variable for programs considered separately properly includes expenditures only on those goods and services which are specifically aided by federal conditional grants.
On the basis of the empirical estimates of Models I and II, the following conclusions may be drawn: first, Ontario and New Brunswick do not appear to respond to changes in Federal conditional and unconditional grants in the same manner. For example, the empirical estimates of Model I reveal that only New Brunswick's expenditures responded as predicted to the receipt of Federal limited conditional grants in the three limited grant programs considered separately, namely, the General Health Grants' Program, hospital construction, and the Trans-Canada Highway. On the other hand, the empirical estimates of Model II indicate that Federal conditional grants for hospital construction, hospital insurance and diagnostic services, social welfare, and lands (settlement and agriculture) stimulated both provinces' expenditures in these areas during the period from 1948 to 1970; and that Federal grants for the Trans-Canada Highway encouraged Ontario's total road expenditures while gr'-nts received under the General Health Grants' Progran and under the various forestry programs stimulated New Brunswick's expenditures on general and public health and on forests, respectively. With regard to unconditional grants, only Ontario's expenditures on education and New Brunswick's expenditures on lands (settlement and agriculture) were stimulated by their receipt.
A second conclusion is that conditional grants stimulate spending on individual programs to a greater degree than do unconditional grants; and, third, unconditional grants are used as a substitute for own source revenue in the case of New Brunswick. In addition, the theoretical models' predictions that a province responds to the same extent to changes in net provincial product and unconditional federal grants is supported in the case of both Ontario and New Brunswick.